Company issues a four-year, 7.5% fixed-rate interest only, nonpre-payable $1,000,000 note payable on December 31, 2000. It decides to change the interest rate from a fixed rate to variable rate and enters into a swap agreement with M&S Corp. The swap agreement specifies that Sarazan will receive a fixed rate at 7.5% and pay variable with settlement dates that match the interest payments on the debt. Assume that interest rates have declined during 2001 and that Sarazan received $13,000 as an adjustment to Interest expense for the settlement at December 31, 2001. The loss related to the debt (due to interest rate changes) was $48,000. The value of the swap contract increased $48,000. a. Prepare the journal entry to record the payment of interest expense on December 31, 2001. b. Prepare the journal entry to record the receipt of the swap settlement on December 31, 2001. c. Prepare the journal entry to record the change in the fair value of the swap contract on December 31, 2001. d. Prepare the journal entry to record the change in the fair value of the debt on December 31, 2001.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

E26-4 (Fair Value Hedge)  Company issues a four-year, 7.5% fixed-rate interest only, nonpre-payable $1,000,000 note payable on December 31, 2000. It decides to change the interest rate from a fixed rate to variable rate and enters into a swap agreement with M&S Corp. The swap agreement specifies that Sarazan will receive a fixed rate at 7.5% and pay variable with settlement dates that match the interest payments on the debt. Assume that interest rates have declined during 2001 and that Sarazan received $13,000 as an adjustment to Interest expense for the settlement at December 31, 2001. The loss related to the debt (due to interest rate changes) was $48,000. The value of the swap contract increased $48,000.

a. Prepare the journal entry to record the payment of interest expense on December 31, 2001.

b. Prepare the journal entry to record the receipt of the swap settlement on December 31, 2001.

c. Prepare the journal entry to record the change in the fair value of the swap contract on December 31, 2001.

d. Prepare the journal entry to record the change in the fair value of the debt on December 31, 2001.

 

E26-5 (Fair Value Hedge) Using the same information from E26-4. Prepare the entries on the books of M&S Corp. The $1,000,000 nonprepayable note is classified as an available-for-sale security by M&S Corp.

a. Prepare the journal entry to record the receipt of Interest on December 31, 2001.

b. Prepare the journal entry to record the payment of swap settlement on December 31, 2001. 

c. Prepare the journal entry to record the change in the fair value of the swap contract on December 31, 2001.

d. Prepare the journal entry to record the change in the fair value of the available-for-sale debt security on December 31, 2001. 

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Accounting for Long-term liabilities
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education